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A Cambrian Moment

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ABOUT 540M YEARS ago something amazing happened on planet Earth: life forms began to multiply, leading to what is known as the ŒCambrian explosion. Until then sponges and other simple creatures had …

ABOUT 540M YEARS ago something amazing happened on planet Earth: life forms began to multiply, leading to what is known as the ŒCambrian explosion. Until then sponges and other simple creatures had the planet largely to themselves, but within a few million years the animal
kingdom became much more varied.
This special report will argue that something similar is now happening in the virtual realm: an entrepreneurial explosion.

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  • 1. January 18th 2014 SPECI AL R EPORT TECH STARTUPS A Cambrian moment
  • 2. Higgsboson. Thesearchfor Whatdoesittaketosupportsuch immensedatastorage? ABETTERWAYHUAWEIOceanStorSTORAGESYSTEM Massiveread-writeabilityandscalabilityforbigdata. Tofindoutmore,pleasevisit:enterprise.huawei.com
  • 3. 1 ABOUT 540M YEARS ago something amazing happened on planet Earth:lifeformsbegantomultiply,leadingtowhatisknownasthe Cam- brian explosion . Until then sponges and other simple creatures had the planet largely to themselves, but within a few million years the animal kingdom became much more varied. This special report will argue that something similar is now hap- pening in the virtual realm: an entrepreneurial explosion. Digital start- ups are bubbling up in an astonishing variety of services and products, penetrating every nook and cranny of the economy. They are reshaping entire industries and even changing the very notion of the rm. Software is eating the world, says Marc Andreessen, a Silicon Valley venture capitalist. This digital feeding frenzy has given rise to a global move- ment. Most big cities, from Berlin and London to Singapore and Amman, now have a sizeable startup colony ( ecosystem ). Be- tween them they are home to hundreds of startup schools ( ac- celerators ) and thousands of co- working spaces where ca ein- ated folk in their 20s and 30s toil hunched over their laptops. All these ecosystems are highly inter- connected, which explains why internet entrepreneurs are a glo- bal crowd. Like medieval jour- neymen, they travel from city to city, laptop not hammer in hand. A few of them spend a semester with Unreasonable at Sea , an accelerator on a boat which cruises the world while its passengers code. Anyone who writes code can become an en- trepreneur anywhere in the world, says Simon Levene, a venture capi- talist in London. Herewegoagain,youmaythink:yetanotherdotcombubblethatis bound to pop. Indeed, the number of pure software startups may have peaked already. And many new o erings are simply iterations on exist- ing ones. Nobody really needs yet another photo-sharing app, just as no- bodyneededanothersiteforpetparaphernaliainthe rstinternetboom in the late1990s. The danger is that once again too much money is being pumped into startups, warns Mr Andreessen, who as co-founder of Net- scape saw the bubble from close by: When things popped last time it took ten years to reset the psychology. And even without another inter- net bust, more than 90% of startups will crash and burn. Butthistimeisalsodi erent,inanimportantway.Today’sentrepre- neurial boom is based on more solid foundations than the1990s internet bubble,whichmakesitmorelikelytocontinuefortheforeseeablefuture. One explanation for the Cambrian explosion of 540m years ago is that at that time the basic building blocks of life had just been perfected, allow- ing more complex organisms to be assembled more rapidly. Similarly, the basic building blocks for digital services and products the technologies of startup production , in the words of Josh Lerner of Harvard Business A Cambrian moment Cheap and ubiquitous building blocks for digital products and services have caused an explosion in startups. Ludwig Siegele weighs its signi cance A C K N O W L E D G M E N T S CONTENTS This report bene ted from the help, insights and scholarship of many people. Special thanks are due to Jon Bradford, Daniel Isenberg, Hussein Kanji, Simon Levene, Reshma Sohoni, Irving Wladawsky-Berger and the Ewing Marion Kau man Foundation. As well as those mentioned in the text, the author would like to thank Anil Aggarwal, Neil Allison, Lea Bajc, Alice Bentinck, Konrad Bergström, David Berlind, Jackson Bond, James Chan, Matt Cli ord, Sarah Cochrane, Jeremy Conrad, Simon Devonshire, Janice Fraser, Fadi Ghandour, Stefan Glänzer, Florian Heinemann, Björn Lasse Herrmann, David Hornik, Darian Ibrahim, Josh Jarrett, Sean Kane, Saul Klein, Ted Kurie, Loic Le Meur, David Li, Je Lynn, Christophe Maire, Mariana Mazzucato, Ann Mettler, Lesa Mitchell, Allen Morgan, Michael Moritz, Max Nathan, Andrew Neely, Andrus Oks, Tim Rea, Slava Rubin, Dane Stangler, Garry Tan, Gwendolyn Tan, Marc Ventresca, Christian Weiss, Albert Wenger, Henrik Werdelin, Ray Wu, Zafer Younis and Niklas Zennström. A list of sources is at Economist.com/specialreports An audio interview with the author is at Economist.com/audiovideo/ specialreports SPECIAL REPORT TECH STARTUPS The Economist January 18th 2014 1 3 Creating a business Testing, testing 4 Venture capitalists From leafy to lofty 5 Accelerators Getting up to speed 6 Building companies Rocket machine 8 Business communities All together now 10 The dark side Founder’s blues 11 Hardware startups Hacking Shenzhen 13 Platforms Something to stand on Follow our coverage of startups at Economist.com/business- nance/ startups
  • 4. 2 The Economist January 18th 2014 TECH STARTUPS SPECIAL REPORT 2 School have become so evolved, cheap and ubiquitous that they can be easily combined and recombined. Some of these building blocks are snippets of code that can be copied free from the internet, along with easy-to-learn pro- gramming frameworks (such as Ruby on Rails). Others are ser- vices for nding developers (eLance, oDesk), sharing code (GitHub) and testing usability (UserTesting.com). Yet others are application programming interfaces (APIs), digital plugs that are multiplying rapidly (see chart 1). They allow one service to use another, for instance voice calls (Twilio), maps (Google) and payments (PayPal). The most important are platforms ser- vices that can host startups’ o erings (Amazon’s cloud comput- ing), distribute them (Apple’s App Store) and market them (Face- book, Twitter). And then there is the internet, the mother of all platforms, which is now fast, universal and wireless. Startups are best thought of as experiments on top of such platforms, testing what can be automated in business and other walks of life. Some will work out, many will not. Hal Varian, Google’s chief economist, calls this combinatorial innovation . In a way, these startups are doing what humans have always done: apply known techniques to new problems. The late Claude Lévi-Strauss, a French anthropologist, described the pro- cess as bricolage (tinkering). Technology has fuelled the entrepreneurial explosion in other ways, too. Many consumers have got used to trying inno- vative services from rms with strange names (which, unavoid- ably, will abound in this special report). And thanks to the web, information about how to do a startup has become more acces- sible and more uniform. Global standards are emerging for all things startup, from programming tools to term sheets for invest- ments, dress code and vocabulary, making it easy for entrepre- neurs and developers to move around the world. Invent yourself a job Economic and social shifts have provided added momen- tum for startups. The prolonged economic crisis that began in 2008 has caused many millennials people born since the early 1980s to abandon hope of nding a conventional job, so it makes sense for them to strike out on their own or join a startup. A lot of millennials are not particularly keen on getting a real job anyway. According to a recent survey of12,000 people aged between18 and 30 in 27 countries, more than two-thirds see opportunities in becoming an entrepreneur. That signals a cul- tural shift. Young people see how entrepreneurship is doing great things in other places and want to give it a try, notes Jona- than Ortmans of the Ewing Marion Kau man Foundation, which organises an annual Global Entrepreneurship Week. Lastly, startups are a big part of a new movement back to the city. Young people increasingly turn away from suburbia and move to hip urban districts, which become breeding grounds for new rms. Even Silicon Valley’s centre of gravity is no longer along Highway101but in San Francisco south of Market Street. Describing what sorts of businesses these startups engage inwouldatbestprovideasnapshotofafast-movingtarget.Ines- sence, software (which is at the heart of these startups) is eating away at the structures established in the analogue age. LinkedIn, a social network, for instance, has fundamentally changed the recruitment business. Airbnb, a website on which private own- ers o er rooms and ats for short-term rent, is disrupting the ho- tel industry. And Uber, a service that connects would-be passen- gers with drivers, is doing the same for the taxi business. So instead of outlining what these startups do, this special report will explain how they operate, how they are nurtured in accelerators and other such organisations, how they are - nanced and how they collaborate with others. It is a story of technological change creating a set of new institutions which governments around the world are increasingly supporting. Startups run on hype; things are always awesome and people super-excited . But this world has its dark side as well. Failure can be devastating. Being an entrepreneur often means having no private life, getting little sleep and living on noodles, which may be one reason why few women are interested. More ominously, startups may destroy more jobs than they create, at least in the shorter term. Yetthisreportwillarguethattheworldofstartupstodayof- fers a preview of how large swathes of the economy will be or- ganised tomorrow. The prevailing model will be platforms with small, innovative rms operating on top of them. This pattern is already emerging in such sectors as banking, telecommunica- tions, electricity and even government. As Archimedes, the lead- ing scientist of classical antiquity, once said: Give me a place to stand on, and I will move the Earth. 7 1Awesome Sources: Apple; Netcraft; Programmable web *Application programming interfaces Web services 2008 09 10 11 12 13 0 0.5 1.0 1.5 2.0 2.5 3.0 0 2 4 6 8 10 12 Apple store apps, m Amazon active sites, mAPIs*, ’000
  • 5. The Economist January 18th 2014 3 SPECIAL REPORT TECH STARTUPS WE EVEN HAD to host the servers in our own o ce. Na- val Ravikant laughs as he describes how in 1999 he and some friends founded his rst startup, Epinions, a website for consumer reviews. They had to raise $8m in venture capital, buy computers from Sun Microsystems, license database software from Oracle and hire eight programmers. It took nearly six months to get a rst version of the site up and running. By comparison, setting up Mr Ravikant’s latest venture, An- gelList, a social network for startups and investors (see box, next page),wasadoddle.Thecostwasinthetensofthousandsofdol- lars, which he put up himself. Hosting and computing power was available, for a small fee, via the internet. Most of the soft- ware needed was free. The biggest expense was the salary of the two developers, but thanks to nifty programming tools they were able to do the job in a few weeks. Mr Ravikant is not the only serial entrepreneur with such a tale to tell. Since the start of the rst dotcom boom in the mid-1990s, launching startups has become dirt cheap, which has radically changed their nature. What was once a big bet on a business plan has become a series of small experiments, an on- going exploration. This shift has given rise to a whole new set of management practices. Not all newly created rms qualify as startups. Steve Blank, a noted expert in the eld, de nes them as companies looking for a business model that allows for fast, pro table growth. The aim is to become a micro-multinational , a rm that is global without being large. Many of them are simply small businesses that use digital technology. A growing number are social enter- prises rms with a social mission. In the past, startups almost univer- sally began with an idea for a new pro- duct. Now the business usually begins with a team often two people with complementary skills who probably know each other well. These founders (a term now used in preference to entre- preneurs ) often work through several ideas before hitting on the right one. Such exibility would have been un- thinkable during the rst internet boom. Startups had to build from scratch most of the things they needed, particularly the computing infrastructure. Today nearly all of the ingredients needed to produce a new website or smartphone app are avail- able as open-source software or cheap pay-as-you-go services. A quick prototype can be put together in a matter of days, which explains the astonishing success of organisations such as Startup Weekend. Since it was created in 2007, its volunteers have organised more than1,000 weekend hackathons with over 100,000 partici- pants in nearly 500 cities, including such far- ung places as Ulaanbaatar in Mongolia and Perm in Russia. Perhaps the biggest change is that computing power and digital storage are now delivered online. At Amazon Web Ser- vices, the biggest cloud provider, the basic package is free and includes750hoursofservertime.Andifanewwebsiteorsmart- phone app proves hugely successful, new virtual servers can be added almost instantly for a small fee. A whole industry of services to help startups tweak their o erings has sprung up, too. Optimizely, itself a startup, auto- mates something that has become a big part of what developers do today: A/B testing. In its simplest form, this means that some visitors to a webpage will see a basic A version, others a slight- ly tweaked B version. If a new red Buy now button produces more clicks than the old blue one, the site’s code can be changed there and then. Google is said to run so many such tests at the same time that few of its users see an A version. To see how people actually use their products, startups can sign up with services such as usertesting.com. This pays people to try out new websites or smartphone apps and takes videos while they do so. Firms can tell the service exactly which user pro le they want (specifying gender, age, income and so on), and get results within the hour. Round and round we go Startups today are in a constant feedback loop, which means they have to be run in a di erent way from their dot- com predecessors. It was only a questionoftimeuntilsomeone wrote down these new man- agement practices, just as Luca Pacioli, a Franciscan friar and mathematician, wrote down the principles of double-entry book-keeping as used by mer- chants in Venice in the late 15th century. Creating a business Testing, testing Launching a startup has become fairly easy, but what follows is back-breaking work 2Hard sell Source: PitchBook *To November 1st Capital invested in startup IT companies, $bn 0 2 4 6 8 10 12 14 2004 06 08 10 12 13* Angel investors Early-stage venture capital Later-stage venture capital Perhaps the biggest change is that computing power and digital storage are now delivered online 1
  • 6. 4 The Economist January 18th 2014 TECH STARTUPS SPECIAL REPORT 2 1 This time there are actually two competing Paciolis, Mr Blank and Eric Ries. They both observed the same company, IMVU, an instant-messaging rm, where Mr Blank was an inves- tor and Mr Ries the chief technology o cer. Their approaches di er somewhat, but they come to much the same conclusion: that the old model of launching a startup or a new product, en- capsulatedbythephrase builditandtheywillcome ,nolonger works.Instead, rmshaveto ndoutwhatcustomerswant.That involves building something, measuring how users react, learn- ing from the results, then starting all over again until they reach what is known as product-market t . In his book Four Steps to the Epiphany and his more re- cent Startup Owner’s Manual Mr Blank tells readers how to tackle what he calls customer development (as opposed to product development), exhorting them to get out of the build- ing and nd out what people really need. Mr Ries’s The Lean Startup is more of a manual for continuously improving an on- line o ering. Even more than Mr Blank, Mr Ries has given startups a vo- cabulary to describe what they do. They should start with a minimum viable product , or MVP, a sort of trial balloon to gauge the audience’s interest. They should always test their as- sumptions, aiming for validated learning . And if their strategy does not work, they should pivot : in essence, throw in the towel and start again with a di erent product. Mr Ries even pre- scribesanewformofaccountingforinnovation:startupsshould TECH MONEYMEN LIKE altitude. In Silicon Valley the leading venture-capital rms cluster on a leafy hill overlooking Stanford University. And when Benchmark Capital opened a branch in San Francisco, it moved into the top oor of the War eld building, home to a popular music venue. Although it is in the Tenderloin, one of the city’s seediest districts, it o ers a great view of the South of Market area, a breeding-ground for startups. The bird’s eye view may be similar, but the landscape beneath is shifting. For a start, the internet has democratised not only the founding of startups but their funding as well. When Naval Ravikant wanted to raise $8m for Epinions on1999 (see main article), he went straight to Benchmark Capital and other venture-capital rms on and around Sand Hill Road in Silicon Valley. But because starting up has become so cheap, today’s founders have plenty of other choices, at least in the early stages: their own bank accounts, friends and family, accelerators, angel investors and the latest addition crowdfunding sites that allow startups to raise money directly from the general public. Second, thanks to websites such as AngelList, startup nancing has become more transparent. Originally a social network for startups and investors, AngelList is now also a funding exchange. As of early Decem- ber its 24,000 accredited investors (people with a net worth of more than $1m or income of more than $200,000 a year) between them had put $250m into more than1,000 startups of the total of 85,000 listed on the site. Lastly, venture-capital rms are no longer seen as God-like. Some experts now claim that most of them are actually not that good at what they do. Venture capital has delivered poor returns for more than a de- cade, concluded a 2012 report by the Ewing Marion Kau man Foundation, a charity that supports entrepreneurship. And contrary to public perception, says Diane Mulcahy, one of the authors, venture capitalists (VCs) do not take a lot of risk. In most funds the partners’ own money accounts for only about1% of total capital. Annual fees of around 2% provide them with a comfortable income even if their investments do not make money. VCs will continue to play an important, if smaller, role in channelling money to startups, says Ms Mulcahy, but many weaker funds will not survive. The number of actively investingVC rms in America has already dropped from 627 in 2007 to 522 in 2012, according to the National Venture Capital Association. At the same time a new class of smaller and more focused micro funds is emerging. They typically raise less than $100m rather than billions, charge lower fees and hope to generate better returns. Angels could also play a bigger part in funding startups. In August AngelList launched a feature called syndicates that allows investors to piggyback on the deci- sions of some other, often well-known, angel. As of early December132 syndicates had been created, of which 37 had backing of more than $50,000. Syndicates may help to alleviate one of the most pressing problems for startups in Silicon Valley and elsewhere. Known as seriesA crunch , it refers to the increasing di culty of raising a rst round of venture capital after the seed funding from angels and other sources. There is not enough serious money to go around for the proliferating number of startups. Times are changing on Sand Hill Road, too. Andreessen Horowitz, launched in 2009, has shaken things up by employing dozens of experts who help portfolio companies with everything from recruiting to public rela- tions. And because startups now need less seed money, some rms have moved up the funding stack, focusing on later-stage rounds. But venture capitalists in the big league remain comfortable. In fact, thanks to the entrepreneurial explosion, they are enjoying a much bigger deal ow, says Bill Gurley of Benchmark in his lofty new quarters in San Francisco. From leafy to lofty Venture capital is adapting itself to the new startup landscape
  • 7. The Economist January 18th 2014 5 SPECIAL REPORT TECH STARTUPS 2 1 keep meticulous track of their experiments and how these in u- ence meaningfulmetrics (notjustariseinthenumberofusers, but what they do with the product). Startups also often use a related method called objectives andkeyresults (OKR).ItwasinventedbyIntel,achipmaker,and later adopted by such rms as Google and Zynga. The idea is that all parts of a company the department, the team and even indi- vidual employees not only set themselves clear objectives (in- crease sales by 25% in the next quarter), but pursue key results that help them get there (hire two new sales people or increase clicks by 10%). Within that framework we can then iterate, which allows us to stay lean, says Carl Waldekranz, the chief ex- ecutive of Tictail, a Swedish startup, which makes it easy to build online shopfronts. Pacioli’sideasspreadbecausetheprintingpresshadjustar- rived in Venice. His treatise about double-entry book-keeping was one of the rst books printed there, in 1494. Mr Ries’s book hasalsospreadhismessage,butsohavehismanyspeeches,You- Tube videos and what he calls the lean movement . More than 1,000 lean-startup groups worldwide meet regularly to discuss the approach. Out ts such as Lean Startup Machine organise workshops. Others, including Luxr, sell teaching materials. Yet others o er tools to track a startup’s performance continuously. Having a lean time of it The lean methodology has caught on quickly, but imple- menting it is not easy. Once you get going, there’s no way you can sit down in a relaxed state of mind and think about the next test, explains Shawn Zvinis, co-founder of Tab, a service to let peoplekeepavirtualtabinLondonshops.ItfoldedinDecember, inlargepart,hesays,becauseitaddedallkindsofbellsandwhis- tles that users did not want. When building Bu er, a service based in San Francisco that lets users put tweets on hold to be sent later, Joel Gascoigne, the British founder, largely stuck to Mr Ries’s methodology. Even to- day, two years after the launch of the service, new features are rst tried as an MVP and any changes A/B tested. Bu er now has more than 1.2m users, with 13,000 of them paying at least $10 a month for extra features. Yet staying lean has been a struggle: As an entrepreneur you’re meant to be bullish about your opinion. But lean means that you constantly have to remind yourself that you could be wrong. Some people are wondering whether founders of lean startups are still entrepreneurs in the conventional sense, rather than empiricists who try to nd a pro table niche. Others ques- tion whether lean startups are capable of signi cant innovation. Leanprovidesausefultoolkit,butitcanbiasyoutowardsthein- cremental rather than the transformational, says Scott Nolan of the Founders Fund, a venture-capital rm that makes big tech- nology bets, such as an investment in SpaceX, a space-transport company. You cannot simply iterate your way into orbit. Mr Ries admits that his methodology has limitations. In his book he warns of analysis paralysis , when founders lose sight of the strategic forest for all the testing trees. Yet he certainly thinks big. His model is Frederick Winslow Taylor, the father of scienti cmanagementinmanufacturing.Tayloraimedtoreduce waste in material resources; Mr Ries wants to avoid squandering the mental kind. In Taylor’s time, Mr Ries argues, most innova- tion was devoted to increasing the productivity of workers and machines. Today the world has the capacity to build almost any- thing imaginable. The big question of our time is not ‘can it be built?’ but ‘should it be built?’, he writes. Staying lean certainly helps to re ne founders’ ideas, but to industrialise the rapid creation of companies they need some- thing else: accelerators. 7 IT FEELS LIKE some prayer meeting. Two middle-aged men start by telling the audience how important it is to pitch in. A booming voice announces the acts, greeted by loud cheers; then some enthusiastic young people jump onto the stage and start talking about their missions. One wants to help women sell their unused clothes and shoes; another to teach children to manage money more responsibly; a third to bring the reinsur- ance market online at last. TechStars, a chain of accelerators (in essence, schools for startups), is known for putting on a good show, as it did in Lon- don in late September. But such graduation ceremonies can now be watched almost anywhere: everyday is demo day some- where around the world. Accelerators’ champions already see them as the new business schools. I’d rather get $100,000 and be a case study than pay $100,000 to read case studies, says Dave McClure, the founder of 500 Startups, an accelerator based in Silicon Valley. The exact number is unknown, but f6s.com, a website that provides services to accelerators and similar startup pro- grammes, lists more than 2,000 worldwide. Some have already become big brands, such as Y Combinator, the rst accelerator, founded in 2005. Others have set up international networks, such as TechStars and Startupbootcamp. Yet others are spon- sored by governments (Startup Chile, Startup Wise Guys in Esto- nia and Oasis500 in Jordan) or big companies. Telefónica, a tele- coms giant, operates a chain of 14 academies worldwide. Microsoft, too, is building a chain. Predictably, many observers talk about an accelerator bubble .Yetifitisabubble,itisunlikelyevertode atecomplete- ly. Accelerators are too useful for that. Not only do they bring startups up to speed, provide access to a network of contacts and give them a stamp of approval. They also perform a crucial func- tion in the startup supply chain: picking the teams and ideas that Accelerators Getting up to speed The biggest professional-training system you have never heard of 3Startup your engines Source: Seed-DB *Total of accelerators in network Total follow-on funding for alumni from top accelerators By region, $m Y Combinator TechStars* AngelPad 500startups Seedcamp Startupbootcamp* Chinaaccelerator OpenFund SparkLabs Startmate Sydney Number of alumni companies 566 248 73 153 110 88 8 31 16 21 ASIAPACIFICTHEAMERICASEUROPE 0 20 40 60 80 100 1,642.2 431.5
  • 8. 6 The Economist January 18th 2014 TECH STARTUPS SPECIAL REPORT 2 1 are most likely to succeed and serving them up to investors. Business schools emerged in the second half of the 19th century to meet an educational need not provided for by other institutions. Accelerators are trying to ll a similar gap today. But theyalsocalltomindanothersortofeducationalinstitutionthat became popular during the dotcom boom: incubators. The idea was to give startups a home and o er them technical, legal and other services. Yet many of the edglings did not y. The incuba- tors often felt too cosy, and their operators had no interest in pushing out their tenants as long as they were paying rent. The mixed success of incubators was one reason why Paul Graham, a former software entrepreneur and angel investor, chose a di erent set-up for Y Combinator, which went on to nurture such successes as Dropbox and Airbnb. Founders who take part in its programme have to move to Silicon Valley for the duration, but Y Combinator itself is not much more than an assembly hall in the heart of the region where participants meet for weekly dinners, listen to guest speakers and talk to Mr Graham and his partners. It started as a summer programme and the roots still show, with courses running for three months, about the length of an academic summer break. Teams all join at the same time, in batches. Applicants are rigorously screened and the best invited forinterview.Forthelatestbatch74(includingsixnot-for-pro ts) were selected from a eld of more than 2,600. Those lucky few get paid between $14,000 and $20,000 to attend. In return they have to hand over about 7% of their rm’s equity. Y Combinator is still the most successful startup school. Its boss maintains a steely control reminiscent of Apple’s late Steve Jobs, but others adopt a more open approach. TechStars, the model for most accelerators, has even created a Global Accelera- tor Network for startup schools. This is not an entirely disinter- ested move: it aims to create a platform for like-minded organisa- tions in which its programmes will have Ivy League status. Founded in Boulder, Colorado, by David Cohen and Brad Feld, two angel investors, TechStars is also highly selective and takes an equity stake in the companies it accepts, and it, too, ad- mits new startups in batches for three months at a time. But it feels more like a real school than does Y Combinator: founders toiltogetherinclassesofadozenpeople,andtheyhaveteachers- cum-mentors who serve as sounding boards. The company has Applicants are rigorously screened. For the most recent course 74 were selected from a eld of more than 2,600 and paid between $14,000 and $20,000 to attend WHY BOTHER WITH accelerators? Why not just hire a bunch of clever youngsters, provide them with the necessary cash, support and technology, and tell them to pursue a busi- ness idea with a proven success record? That should make it possible to start a new com- pany in weeks, not months or years. In a nutshell, that is the idea behind Rocket Internet, an e-commerce conglomer- ate based in Berlin. It controls 75 rms in 50 countries with a total of more than 25,000 employees and a combined annual revenue of more than 3 billion ($4 billion). Together with two similar out ts, ProjectA and Team Europe, also based in Berlin, it has pioneered a category called company builders . Critics call Rocket a clone factory , with some justi cation. The headquarters near the Brandenburg Gate does not feel like a creative co-working space, more of a boiler room, as call-centres for salespeople peddling penny stocks are known. In 2009 the rm launched CityDeal, a European online-coupon site. Six months later it sold the business to Groupon, the American original, for Groupon shares then worth nearly $126m. Being branded a plagiarist clearly irks Oliver Samwer, the most active of the three sons of a Cologne lawyer who run Rocket.He explains that consumers are similar every- where, so the same e-commerce ideas will work the world over. What counts is not so much coming up with ideas but implementing them well. A bridge is a bridge wherever you are. We are a construction company. Rocket prides itself on being ruthless about execution: it has key performance indicators for everything. If the rm’s exec- utives miss their sometimes insanely ambi- tious targets, they quickly incur Mr Samwer’s wrath. But Rocket’s e ciency also owes something to its culture of sharing. Its rms learn from each other, often across countries, and they bene t from common services such as marketing andIT. Our goal is to build a global galaxy of rms with Rocket at the centre, says Mr Samwer. To expand its universe, Rocket lures consultants from rms such as McKinsey and Boston Consulting Group, o ers them a reasonably attractive salary and a slice of the equity in its ventures and provides them with the skills they will need to strike out on their own. E-commerce ventures also require tons of cash to build warehouses and buy inven- tory. In 2012 Rocket raised more than $1 billion from investors such as Kinnevik, a Swedish investment rm,DSTGlobal, a Rus- sian fund, and JPMorgan. Some of Rocket’s rms look like win- ners, such as Zalando, a European chain of footwear and clothing sites, and Dra ti, which dominates online fashion in South America. But others shine less, including Home24, which sells furniture on the internet, and Wimdu, an Airbnb clone. Being a privately held rm, Rocket does not have to tell the world whether it is making a pro t. Some see it as the corporate model of the future, others think it may not last. The air is certainly getting thinner for the Samwer brothers. In the past their ventures grew quickly in developing countries and in Europe because American start-ups were slow to expand abroad, but in recent years the Ameri- cans have become more globally minded, leaving less scope for Rocket. Some analysts also question whether in the longer term the rm’s relatively low-risk e-commerce ventures can make decent pro ts and attract talent. The founders of ProjectA left in 2011because they wanted to try riskier ideas. Last March the Samwer brothers set up a separate venture fund to invest in promising new businesses. Ultimately, Rocket’s fate will depend on Oliver Samwer. A former colleague describes him as eine absolute Maschine . He jets tirelessly around the world and calls his col- leagues at any time of day or night. I can sleep anywhere, he once told a reporter. But if this engine were to stop, the internet’s rocket might come down to Earth. Rocket machine How to build companies from a kit
  • 9. The Economist January 18th 2014 7 SPECIAL REPORT TECH STARTUPS 2 1 replicated its model in ve American cities and in London. The chain’s classroom in Britain’s capital is a oor in War- nerYard,aco-workingspaceinthedistrictofClerkenwell.Teams share tables, but banter is kept to a minimum. Get shit done, reads one scribble on a blackboard. Wasting two out of seven days is not an option, proclaims another. Dominating the room is a big digital clock counting down to demo day when they all have to present their projects. Three months in purgatory That clock is basically your life, says Laurence Aderemi, chief executive of Moni, a mobile service designed to make it easy to send money abroad. He initially sat right in front of the clock, but moved his seat after it appeared in a nightmare. Twelve-hour working days are at the lower end of the scale. If necessary, founders dispense with sleep altogether and work non-stop. Some sever all contact with friends and family during the programme. Most accelerators do not have much in the way of a xed curriculum. Managers of startup schools regularly meet up with the founders and organise a few classes on such matters as taxes andpayroll.Theyalsomakeextensiveuseofmentors,mostlyex- perienced entrepreneurs, investors or other experts who have seen it all before. For mentoring to work, founders and mentors have to be well matched, so TechStars programmes start with a mentoring marathon:overtendaysfoundersmeetmorethan100peoplefor half an hour each. SeedCamp, another accelerator based in Lon- don, regularly brings together two dozen invited startups with nearly 400 experts over the course of week. This can be both useful and confusing. At a recent Seed- Camp session the four mentors quizzing the founder of Legal- Tender,amarketplaceforlegalservices,soonhomeinonthecen- tral problem of such a business: reaching a point where demand and supply feed on each other. But they o er di erent kinds of remedies:onesuggestsstartingo withrecruitinglegal rms,an- other specialising in certain kinds of legal work, and a third working with a professional organisation. Mentors usually do not get paid, but they seem to enjoy the experience. It’srejuvenatingmybrain, saysKevinDykes,aseri- al entrepreneur who is a regular at Startupbootcamp in Berlin, but I also want to give back to the community. Some mentors become paid advisers or even investors. At TechStars they are of- ten the rst people to put money into a startup after demo day. Cynics say that mentoring is just a form of due diligence and a way of creating a proprietary deal ow meaning privi- leged access to good deals. Some accelerators themselves have funds for additional investments in alumni’s businesses, or work with venture-capital funds that put money in all the start- ups in a batch, sight unseen. They see it as a bet on an index fund, hoping that among the startups will be a few big winners an approach to venture investing known as spray and pray . But demo day remains all-important for attracting investors. Startups are told to think about their pitches from the day they enter the programme. The last few weeks are often dominated by rehearsals. The presentations themselves are usually only a few minutes long, but they have to do far more than provide information about what the rm does, the pedigree of the founders and the size of the market. To persuade an investor to ask for a fol- low-on meeting, they must be master- pieces of storytelling about the startup’s chances of success. You have to pull them into your re- ality-distortion eld, says Paul Murphy, the founder OP3Nvoice, another Tech- Stars London startup that sells technology to search audio and video recordings. The competitionisnotsomuchtheother rms presenting but the investor’s smartphone, where another message is always de- manding attention. When you add it all up, accelerators are quite di erent from business schools. One helps you with that startup, the oth- er provides you with a framework for 20 years, says Jon Eckhardt, who heads the entrepreneurship centre at the University of Wisconsin-Madison and has co-found- ed an accelerator. Still, he thinks, for most founders, startup schools are probably worthwhile. Much of the learning takes place among the founders themselves, says Susan Cohen of the University of Richmond, Virginia, who has written a dissertation on the subject. Teams are
  • 10. 8 The Economist January 18th 2014 TECH STARTUPS SPECIAL REPORT 2 1 BLOCK 71 HAS long been slated for demolition. A look at the tenant list for the seven-storey industrial building on Singapore’s Ayer Rajah Crescent helps explain why it is still standing: nearly 100 startups live there o cially and perhaps as many again informally. Their often strange monikers are inter- spersed with the more conventional names of venture-capital rms, accelerators and the like. It is the world’s most tightly packed entrepreneurial ecosys- tem, and a perfect place to study the lengths to which a govern- ment can go to support startup colonies. They essentially force- fedentrepreneurshiptotheyounggeneration, saysBoweiGai,a Chinese-American entrepreneur who is working on a World Startup Report after visiting nearly three dozen ecosystems around the world, starting in New Delhi in January last year and ending in Singapore in September (see map, next page). The term ecosystem for economic clusters was popular- ised 20 years ago by James Moore, then a business consultant and now a human-rights advocate, who was fond of ecological metaphors. These days the emphasis is less on eco than on system . For some experts, such as Daniel Isenberg of Babson College, entrepreneurial ecosystems are made up of domains , including markets, policy and culture. Others describe them as collections of actors that play certain roles, such as providing tal- ent, nanceandinfrastructure.Yetotherstalkaboutthemasaset of resources entrepreneurs can draw on. In some ways, ecosystems can be seen as exploded corpo- rations. Finance departments have been replaced by venture- capital funds, legal ones by law rms, research by universities, communications by PR agencies, and so on. All are nodes in a loose-knit support network for startups that does what in-house product-development teams used to do. SiliconValleyistheoriginalentrepreneurialecosystem,but in recent years such communities have popped up all over the world. They often form in places where young people want to live: Berlin, Boulder, London. Perhaps the most unexpected one is Amman’s; despite the political turmoil in the region and a civil war in Syria next door, Jordan’s capital has a few hundred start- ups. Israel boasts the largest number of startups per person. Don’t be sel sh Singapore’s companies are not known for being particular- ly open, but Block 71 has its own ethos. Vinod Nair of Catapult Ventures, which operates price-comparison websites for nan- cial products, talks freely about problems with government pa- perwork and immigration rules. Dixon Chan of Burpple, a pho- to-sharing service for food, admits that his parents were not happy when he started his company. And Ray Wu, a manager at theJoyfulFrogDigitalIncubator,isremarkablyhelpfulinguiding visitors through Singapore’s startup scene. Perhaps it comes from reading Startup Communities by Brad Feld, co-founder of the TechStars accelerator network. The book is a to-do list for building an entrepreneurial ecosystem in your city , as the subtitle puts it. Mr Feld describes startup com- munities as self-governing bodies of craftsmen akin to medieval guilds. The rst point of his Boulder Thesis (named after the city in Colorado where he lives) is that entrepreneurs must lead. A second is that a startup community must be open to anyone who wants to join. But the main message is that you must give before you get . For an individual, giving before getting is good business. In a fast-moving and uncertain industry he may need someone’s help some day. It’s about building social capital, says Hussein Kanji of Hoxton Ventures, a London venture-capital fund. More important, though, business in ecosystems is not a zero-sum game. Tom Eisenmann of Harvard Business School explains that startup colonies are platforms with strong network e ects, a bit like Windows and Facebook: the more members they have and themoreactivitytheygenerate,themoreattractivetheybecome. This helps explain some of these ecosystems’ other charac- teristics: their tolerance of failure, the endless succession of start- up-related talks, meetings, parties and, above all, the constant hype. But what really gets those network e ects going is ex- its a sale to a bigger company or a listing on a stock exchange. Newly enriched founders often become investors themselves and employees start their own companies. Silicon Valley spawnedasuccessionof clans emergingfromcompaniessuch as Fairchild Semiconductor, Netscape and PayPal. Government policy can make a big di erence. Even in Sil- icon Valley, defence dollars during the second world war and the cold war primed the pump before venture capital took over. Nor would Singapore have much of an ecosystem to boast of with- Business communities All together now What entrepreneurial ecosystems need to ourish keen to help each other: the better the batch, the bigger the chances that all its members will attract investors. Butfoundersmayloseasliceofequityandtime,whichisat a premium in the fast-moving tech world. You know what I’m tiredof?Richguyslaunching‘startupaccelerators’sotheycanrip o new startup founders, said Ryan Carson, a British entrepre- neur, on his blog. Others worry that startup schools drain scarce talent from fast-growing companies and accelerate too many ideas that struggle to nd funding. More fundamentally, it remains to be seen whether acceler- atorsaregoodbusiness.Formany,makingmoneyisnotthegoal: big companies often launch them to tap into the startup commu- nity or as a marketing exercise; governments subsidise them to foster their entrepreneurial ecosystem; and many angels see their investment in them as a way of giving back. But most accel- erators that take equity in their startups hope that at least some will return a respectable multiple of the investment. It will take time to nd out whether those hopes are ful- lled. Most accelerators were established after 2010, and most startups that have gone through them are still works in progress. Research about accelerators is in its infancy and there are no gen- erally agreed ways to evaluate their performance. Still, a nancial picture of the industry is starting to emerge. Jed Christiansen, who works for Google in London, tracks182 ac- celerators which have nurtured more than 3,000 startups. Be- tween them, those have raised $3.2 billion in follow-on funding and generated exits worth $1.8 billion. This landscape is dominated by American rms, with Y Combinator and Tech- Stars franchises leading the pack (see chart 2 in this article). This suggests that accelerators are a winners-take-most market. Founders are highly mobile, and the best will try to get into the leading startup schools, making it harder for the rest to turn a pro t. There will be a washing out, predicts Alex Farcet, the founder of Startupbootcamp. But accelerators alone will not ensure success. It takes a much broader ecosystem for a startup to thrive. 7
  • 11. The Economist January 18th 2014 9 SPECIAL REPORT TECH STARTUPS 2 1 out the bene t of government support. It is not that Singaporeans are unusually afraid of failure. In a study by the Global Entrepreneurship Monitor, only 43% of re- spondents in the city-state said it would put them o starting a business, only slightly more than in Israel and fewer than in Ger- many (49%). But entrepreneurs in Singapore do not enjoy a par- ticularly high social status. Families prefer their o spring to get a safe job with one of the many multinational companies or, even better, with the government. Investors, too, have generally preferred to put their money abroad rather than into local internet startups. After the collapse of the dotcom bubble in 2000 only a few of the venture-capital rms based in Singapore continued to invest there. And those whodidlackedexperience,explainsWongPohKam,thedirector of the entrepreneurship centre at the National University of Sin- gapore (NUS), who helped set up many of the city-state’s startup programmes, including Block 71. It may seem surprising that Singapore’s government cares so much about startups, since the country has enjoyed plenty of foreign direct investment (FDI). But o cials such as Low Teck Seng, the chief executive of the city-state’s National Research Foundation (NRF), admit that Singapore can no longer just rely on multinational companies and needs to do more to encourage entrepreneurship. To speed up this shift, it has taken every conceivable step to make life easier for entrepreneurs. Registering a company now takes hours rather than weeks. Every year the NUS sends120-150 students on a one-year internship to Silicon Valley and other ecosystems, and many of them go on to become founders. Back home, entrepreneurs are o ered matching grants of up to S$50,000 ($40,000) and a place in an incubator to get their star- tup o the ground. Investors get an even better deal, allowing them to take all the bene ts of a venture yet protecting them against much of the risk a model successfully pioneered by Israel. The NRF gener- ouslytopsupinvestmentsbyaccreditedincubators:foreveryS$1 they put in, the agency adds S$5, up to a maximum of S$500,000. Investors also have the right to buy back the govern- ment stake at the original price plus a modest interest charge within three years. The results have been impressive. Mr Gai estimates that the city-state now has about 800 internet rms, or160 for every mil- lion inhabitants, which puts it ahead of countries such as the NetherlandsandSpain.Ithasalsopresidedoverafewsuccessful exits, notably Viki, a popular video- streaming site which in September was bought for $200m by Rakuten, a Japanese e-commerce giant. Yet these numbers do not quite tell the full story. Most successful startups in Singapore are still run by foreigners. Raz- mig Hovaghimian, Viki’s founder, is an Egyptian-American, and never received any government help. And most of the rms that have raised money from the ac- credited incubators have yet to nd any follow-on funding. Moreover, it is not clear what will happen once Singapore’s government scales back its nancial sup- port, which eventually it must if it does not want to subsidise the ecosystem per- manently. Some investors are already complaining about plans for a cut in the NRF’s initial investment in information- technologystartupstoabouthalfitsprevi- ous level. Medical-equipment and other non-IT rms will get more money. Singapore’s government could spoil the party in other ways, too. A new media law requires certain websites to register, increasing the risk for investors. And new labour regulations makeitharderfor rmsbasedinthecity-statetobringinworkers from abroad, exacerbating the scarcity of skilled developers. This is not to say that Singapore’s ecosystem will fall apart. San Luis Potosi Cebu Hamburg Vilnius LITHUANIA UNITED STATES (87) BRITAIN (10) FRANCE (2) SPAIN AUSTRALIA (5) GERMANY (3) RUSSIA (5) NEPAL INDIA (4) KENYA ETHIOPIA ISRAEL (6) GREECE UKRAINE NETHERLANDS BRAZIL (4) PERU CHILE ARGENTINA (1) COLOMBIA CHINA (26) SOUTH KOREA (7) JAPAN (11) TAIWAN THAILAND PHILIPPINES VIETNAM MYANMAR MALAYSIA London Paris Rio de Janeiro Buenos AiresSantiago Lima Bogotá New YorkSan Francisco São Paulo Addis Ababa Nairobi Mumbai Kathmandu New Delhi Bangalore Barcelona Madrid Kiev MoscowBerlin Munich Athens Tel Aviv Amsterdam Yangon Bangkok Kuala Lumpur Taipei Shanghai Seoul Beijing Tokyo Manila Sydney Melbourne Ho Chi Minh City Jakarta SINGAPORE INDONESIA Source: Bowei Gai, World Startup Report Number of internet firms 2013 Bowei’s travels (00) 10,000 1,000 = Number valued over $1bn With its huge market and vast pool of venture capital, America is still the destination of choice for founders the world over
  • 12. 10 The Economist January 18th 2014 TECH STARTUPS SPECIAL REPORT 2 1 In fact, the city-state’s e cient bureaucracy has a record of learn- ing from mistakes and proving naysayers wrong. Teo Ser Luck, the minister of state in charge of such matters, is in regular touch with entrepreneurs and investors, and the government recently decided to give over another building near Block 71to startups. But ecosystems are more fragile than their leaders’ con - dent manner suggests. Network e ects can easily go the other way. And governments have to tread carefully because national ecosystems increasingly form part of larger global organisms. Founders and investors, already used to entrepreneurial globe- trotting, will readily consider moving to another place if it seems to have more to o er. Often that place is America. With its huge market and vast pool of venture capital, it is still the destination of choice for founders the world over, even though the country’s restrictive immigration policy since September 11th 2001 has made it more di cult for them to settle there. If Asia and Europe do not watch out, their best startups could still end up in Silicon Valley or in one of America’s newer ecosystems, such as Austin, Boulder or New York. 7 A YEAR AGO Jody Sherman shot himself. His online shop, Ecomom, which sold eco-friendly and health products for children, was running out of cash. A few weeks later the busi- ness closed its virtual doors. A new owner relaunched it in June. There is no evidence that entrepreneurs kill themselves moreoftenthanpeopleinotherhigh-pressurejobs,butthenews of Sherman’s death (which coincided with the suicide of Aaron Swartz, an internet activist) led to a rare moment of self-exami- nation in the startup sphere. In a blog post Jason Calacanis, an outspoken serial entrepreneur, mused whether there was a need to examine if the pressures of being a founder, the pressure of our community’s relentless pursuit of greatness, in some way contributed to their deaths . These pressures form part of the darker side of startups, along with concerns that startup communities, though very in- ternational, are made up largely of youngish white males who are not so much entrepreneurs as new kinds of workers. A fur- ther worry is that software and hence startups are eating not just the world but jobs, too. Askfounderswhytheyputupwiththehardships,andthey replywithpredictableenthusiasm. Iwanttochangetheworld, says Daan Weddepohl, chief executive of Peerby, a service based in Amsterdam that could indeed make a di erence if it takes o . It lets people borrow things they need (a drill, a lawnmower, an icemaker) from their neighbours within half an hour. Butbeneaththisfervourthereisoftenaworldofuncertain- ty. In essence, a founder’s job is to create something out of noth- ing, which often means convincing people that there may be something in their idea. Building a startup is all about building credibility with investors, partners, customers, the media, ex- plains Mr Weddepohl, a recent TechStars alumnus. A big part of that is hype. Everything is always awesome, but even startups considered successful tend to have huge is- sues, says Andreas Klinger, an Austrian who co-founded a (now defunct) London-based online shop for designer clothing. What makes being a founder stressful is being on an emo- tional roller-coaster all the time. In the morning you feel every- thing is on the right track and in the evening everything seems in the gutter, says Shawn Zvinis, the co-founder of Tab, a London startup which closed in December. There are days you don’t want to get out of bed. And you ask yourself: does changing the world feel like this? For most founders money is a constant worry. Investors of- ten give them only relatively small sums at a time. To keep costs down and make sure that employees get paid, they draw little moneyforthemselvesandliveascheaplyastheycan. Ifyouha- ven’t missed payroll at least once, you are not a real entrepre- neur, goes a startup mantra. Since many founders have no life outside their company, they consider it their family. That makes it traumatic when a long-standing employee or, worse, a co-founder leaves. It’s like getting divorced, says Mr Weddepohl, who has twice parted company with a co-founder. Attitudestofailurevarybyculture,thoughitisalwaysaper- sonal disaster when, after years of hard slog, a founder realises that the dream is over. But many still want to give it another try. It’s part of the game. You have to ask yourself what you have learned and move on, says Gaith Kawar, a Jordanian serial entrepreneur who is on his seventh startup. Some experiment not only with new services but new workpatternstoo.AtJimdo,a rmbasedinHamburgthatmakes iteasytobuildwebsites,employeescameupwithaninternalset of rules to keep their to-do list manageable and ensure they are well-rested . This does not seem to have hurt the rm: it has helped customers to set up 10m websites from o ces in San Francisco, Tokyo and Shanghai and employs170 people. One-track minds But on the whole the startup world, even more than other forms of business, leaves little room for life beyond work. That may be one reason why only about10% of founders are women, according to Compass, a startup research out t. It does not help that there are hardly any female role models, and that many schools do not encourage girls to take an interest in computing. The nancial side is similarly male-dominated. In 2013 less than 5% of IT investments were made in rms founded by wom- en, according to PitchBook, a research rm (see chart 4). And it is notjustwomenwhoareunderrepresented.Foundersmaycome from all over the world, but most of them are white or pale. The lack of ethnic diversity is particularly noticeable in ac- celerators, but their managers say there is little they can do about it: the people who present themselves are a bunch of white and Asian dudes , notes Mr Graham, the founder of Y Combinator. This seems likely to limit innovation. Still, a growing number of investors now at least recognise that there is a problem. Having The dark side Founder’s blues Are startups just for workaholic white male lumpen-preneurs? 4Invisible Source: PitchBook *To November 13th Capital invested in American IT companies founded by women 2004 171 213 05 181 06 242 07 270 08 326 09 431 10 11 12 13* % of total Invested capital, $m 1.8 2.0 1.7 1.9 2.2 4.0 4.3 4.9 4.1 4.9 673 548 588
  • 13. The Economist January 18th 2014 11 SPECIAL REPORT TECH STARTUPS 2 1 found that only a handful of its applicants were female, Entre- preneur First, a London accelerator for individual founders, de- cided to launch CodeFirst:Girls, a series of free courses to teach female students how to code. Among the latest batch, four out of 31founders are women, which is still not great. A more diverse group of founders might develop a more mature self-image. For the moment many see themselves as the next Steve Jobs or Mark Zuckerberg, but last year Venkatesh Rao of Ribbonfarm, a consultancy, o ered a di erent narrative. En- trepreneurs are the new labour, he claimed in a series of well- argued blog posts with the same title. And it is true that many founders do indeed live on rent and ramen [noodles] . But Mr Rao’s analysis goes deeper. He sees a connection between to- day’s entrepreneurs and the artisan steelmakers of the late 19th century. As the market matured, he explains, the Victorian steel- workers’ knowledge became commoditised, making them the nucleus of the new working class. Something similar is now happening to founders, Mr Rao claims. The lean startup methodology, the accelerators and the standardised term sheets for investments are all signs that the knowledge required to run a startup is becoming codi ed and commoditised. This has tilted the balance of power between in- vestors and entrepreneurs, he writes. Investors have won, and their dealings with the entrepreneur class now look far more like the dealings between management and labour. Many founders will end up being acqui-hired , with a large tech company buying a startup not for the technology but for the team, reckons Mr Rao. That may be no bad thing: a good engineer will quickly get a job that he would have taken twice as long to reach on a conventional career ladder, as well as a signif- icantchunkofcash.Butitputsadi erentlightonstartupsandac- celerators, suggesting that they are less about identifying the next Mr Zuckerberg or Mr Jobs than about providing a new sys- tem to train workers for the knowledge economy. A trickle of jobs Can founders not at least feel good about themselves as job creators? Between 1990 and 2011 information and communica- tion technology (ICT) businesses in America aged between one and ve years increased their workforce by10% a year, according toarecentstudybytheEwingMarionKau manFoundation.But since most of these businesses are small, so are the absolute numbers of jobs they generate. Although startups often scale quickly, they rarely become massive , says Erik Brynjolfsson of MIT Sloan School of Management. Inanewbook, TheSecondMachineAge ,co-writtenwith a colleague, Andrew McAfee, Mr Brynjolfsson contrasts East- man Kodak, founded in 1880, with Instagram, a photo-sharing apponly18monthsoldthatwasboughtbyFacebookforabout$1 billion in 2012. In its heyday Kodak employed over 145,000 peo- ple and indirectly provided work for thousands more. It led for bankruptcy a few months before Insta- gram was sold. At the time of the sale the photo-sharing rm had 130m customers but just 16 employees. Even Facebook, which now boasts more than 1.2 billion users, employs only about 5,800 people. Yet it would be wrong to conclude that the entrepreneurial explosion will lead to more unemployment, argues Mr Brynjolfsson. Startups may disrupt exist- ing industries, but they often create the foundation for many new jobs outside their own business. On Etsy, an online marketplace for homemade items, more than1mpeoplehaveopenedstorestoselltheirwares.OneLance and oDesk, two freelancing sites, 2.3m and 4.5m members re- spectively are o ering their services. Most important, digital technology has created endless possibilities for new products. The answer is not less entrepre- neurship but more, says Mr Brynjolfsson. We are in no danger of running out of combinations to try. That cornucopia is now extending from software to hardware. 7 OH NO, NOT another accelerator, you may think. But this oneisdi erent.Onthetablesarenotjusttheobligatorylap- tops and smartphones but circuit boards, cables, screwdrivers and a few items which look only vaguely familiar. One resem- bles a very old mobile phone with an oddly shaped knob at- tached to it. Another, a set of small blocks with switches and but- tons, calls to mind a disassembled mixer in a recording studio. Yet another might be the microphone of a computer headset, but is mounted on a pair of glasses. Even more surprisingly, the home of Haxlr8r (pronounced Hackcelerator ) is not some co-working space in London or San Francisco but the 10th oor of an o ce building in Shenzhen. The city in the Pearl River Delta, close to Hong Kong, is the world capital of electronics: most of the planet’s digital devices are as- sembled in factories in and around the city. Haxlr8r is living proof that, as Karl Popper once said, his- tory repeats itself, but never in the same way. Just as with soft- ware services, new technology makes it ever easier to build new typesofdevices,mostofthemconnectedtotheinternet.Thedif- ference is that making hardware remains, well, hard which is why Haxlr8r is in Shenzhen. That way its teams may avoid the fate of a rst generation of hardware startups, mostly based in America. They put their ideas up on Kickstarter and Indiegogo, the leading crowdfunding services, but then endured months of delay or never got as far as manufacturing their devices. The technologies that allowed software services to be de- velopedmorecheaplyandquicklywerecloudcomputing,social networks and any number of digital services called application programming interfaces (APIs). For hardware the list includes all of the above plus 3D printers, sensors and microcontrollers Hardware startups Hacking Shenzhen Why southern China is the best place in the world for a hardware innovator to be
  • 14. 12 The Economist January 18th 2014 TECH STARTUPS SPECIAL REPORT 2 1 which bridge the analogue and the digital worlds. The platform for most connected devices is smartphones. All these elements can be combined in countless ways, creating a Cambrian explo- sion not just in software but in physical electronic devices too. When the latest batch of founders arrived at Haxlr8r in Au- gust, new wireless chips based on a standard called Bluetooth Low Energy (BLE) had just become widely available. These are cheaper and less power-hungry than the previous generation, andstartupsdonothavetoaskAppleforpermissiontousethem totethertheirdevicestotheiPhone(andpayforit).Mostteamsat Haxlr8r went on to use BLE chips in their contraptions. The old mobile phone with the knob is actually a wireless tuning device called Roadie and an example of how technol- ogy, personal interest and culture can come together in surpris- ing ways. Bassam Jalgha and Hassane Slaibi are the founders of Beirut’s rst hackerspace, a clubhouse for tinkerers. But they are also musicians and know how di cult it is to tune a lute, a pop- ular instrument in Lebanon. So when they came to Shenzhen, they set out to build something that makes it easy to tune string instruments. A smartphone app listens to the sound and tells the motor in the tuning device whether to tighten or loosen a string. The blocks, called Palette, are indeed the components for a mixer of sorts and are meant to be assembled by designers and photographers who need a physical interface for repetitive tasks on a computer. The microphone, dubbed Vigo, is a drowsiness meter : the tip contains a sensor that measures how often a user blinks a sign of how tired he is, and whether he should stop driving or get a cup of co ee. Yet most of the value of such devices is not so much in the design but in the software and services that are part of the pack- age. Roadie comes with a smartphone app, Palette, with a pro- gram that runs on a PC. Vigo will show the user on a website how his attention uctuates over time. Such o erings not only make products harder to copy but might allow their makers to earn additional money from subscriptions. Makers and shakers When Cyril Ebersweiler and Sean O’Sullivan, two venture capitalists, set up Haxlr8r in September 2011, they chose Shenz- hen for a good reason. The district of Futian, the accelerator’s home, has dozens of shopping malls for electronics. The biggest is the Seg market. The bottom oor is reserved for screws, cables and chips, and as you go higher up the products become more nished: circuit boards, networking equipment, personal com- puters.Thesixth ooro ersLEDsinallshapesandsizes,fromsu- per-thin Christmas garlands to super-bright lamps. Shenzhenisalsopackedwithallkindsofsuppliersandser- vice providers that can make life easier for hardware startups. Having a new circuit board made there takes days, not weeks as it does in America, reports Eszter Ozsvald of Notch, another Haxlr8r startup. Her company is developing small motion track- ers. And had Wearpoint not gone to China, it would probably never have found the track pad it needs for its remote control for Google Glass, a head-mounted display. Being in Shenzhen also allows founders to look at lots of factories, which proved handy for Everpurse, a company that sells fancy handbags with a built-in smartphone charger. If the workers are not happy, they may leak your intellectual proper- ty, says Dan Salcedo, the rm’s co-founder. If a factory passes muster, other Haxlr8r startups often go on to use it too. Howard Hunt, the boss of DustCloud, had scout- ed out a factory to make casings for prototypes of his Dusters, gun-shaped devices for playing open-air laser tag. When he went to pick them up and pay (cash) in early October, the foun- ders of Notch and Wearpoint came along to see whether the fac- tory could also work for them. The meeting showed that people from di erent cultural backgrounds can communicate perfectly well with a minimum of translation. Each time the Western founders asked a question, the Chinese owner of the factory fetched another plastic sample that met with approval. Silvia Lindtner of the University of California, Irvine, and Fudan University in Shanghai, who follows the startup scene in China, is not surprised. The two sides complement each other, she says. The founders of hardware startups, often steeped in the open-sourceculture,partnerwithfactoriesrootedintheChinese culture of shanzhai, which translates as mountain stronghold . It used to mean pirated electronic goods but now stands for open-source manufacturing. Haxlr8r is not the only model for plugging into Shenzhen’s extraordinary manufacturing platform. Another is Seeed Studio, a contract manufacturer for makers, as the world’s ever-growing crowd of tinkerers is called. Haxlr8r is for backpackers who want to do things themselves, explains Eric Pan, who founded Seeed in 2008. We on the other hand o er guided tours. And you don’t even have to come here. Having worked for about 200 makers last year, Seeed is now one of the world’s biggest manufacturers of open-source hardware. When a maker asks Seeed to build a circuit board, the rm keeps a copy of the design which can then be used without charge by other customers. Most factories in Shenzhen work for big customers and have long assembly lines where workers per- form only one task. But makers typically want just a few items and are willing to pay more, so Mr Pan has split his employees into self-organising teams. WhereasSeeedisaChinesecreation,PCHInternationalisa Western take on Shenzhen. Also based in the city, it started out as a sourcing company with a reputation for being the fastest sup- plier of parts to electronics makers. Liam Casey, who founded the company in 1996, had criss-crossed the Pearl River Delta, gathering knowledge about supply lines. PCH later added pack- aging, logistics and manufacturing to its portfolio. Today the rm, which had revenues of $1 billion in 2013, is an end-to-end Shenzhen is packed with all kinds of suppliers and service providers that can make life easier for hardware startups
  • 15. The Economist January 18th 2014 13 SPECIAL REPORT TECH STARTUPS 2 1 PROVIDING THE RIGHT platform is sometimes all it takes. Instead of planning new pedestrian plazas by the usual bu- reaucratic means, New York City’s department of transportation just marks an area on a street with temporary materials and then lets local organisations, architects and citizens decide what to do with it. The programme has so far produced 59 plazas, including the Pearl Street Triangle in Brooklyn, a small urban oasis with big potted plants and shaded seating. In the physical world, platforms can be simply something to stand or build on, like a New York City street. They can also be basic inputs for many other activities and products. Railways al- lowed services such as mail order to develop; the power grid brought forth a plethora of electrical household appliances; and standardised containers boosted global trade. Even Barbie dolls can be seen as platforms for all kinds of pro table add-ons, such as shoes, wigs and handbags. But although physical platforms have been around for a long time, the idea did not attract much attention until the rise of the software industry in the 1980s and 1990s, explains Michael Cusumano, also of MIT Sloan School of Management. The in- dustry quickly split into two parts: operating systems (the plat- forms) and applications that ran on top of them. Bill Gates, the founder of Microsoft, realised much earlier than his rivals that power (and thus pro t) rests with those who control the operating system, in his case Windows. He also saw that the key to creating a successful platform is building a thriv- ing ecosystem around it to get the network e ects going. The more programs that run on Windows, the more users will want it, and therefore the more attractive it will be to developers. Beyond railways Some platforms are internal to a company. In the car indus- try a vehicle’s main components, including steering, suspension and power train, are often shared by di erent models. Other platforms, such as Windows, serve an entire industry. Yet others are closed , meaning that access is tightly controlled, as for Ap- ple’s iPhone. The most widespread are the open ones, which everyonecanusewithoutasking,suchasLinux,theopen-source operating system. Intrigued by Microsoft’s success and its subsequent anti- trustwoes,academicssuchasAnnabelleGawerofImperialCol- lege Business School dug deeper and found that platforms are a common feature of complex systems, whether economic or bio- logical. The core building blocks are kept stable so that the other parts can evolve more rapidly by combining and recombining them and adding new ones. That is what is happening in the startup world: new rms combine and recombine open-source software, cloud comput- ing and social networks to come up with new services. In fact, many of these new services are application programming inter- faces (APIs) mini-platforms that form the basis of another digi- tal product, allowing for endless permutations. The information-technology industry lends itself to this treatment because bits and bytes can be easily rearranged and Platforms Something to stand on Proliferating digital platforms will be at the heart of tomorrow’s economy, and even government platform, a sort of Amazon Web Services for electronics manu- facturing , in the words of Mr Casey. He has even started an ac- celerator, Highway1, which is based in San Francisco, to generate more things to make for his platform. Some rms prefer to go it alone, like Zound Industries, a Swedish maker of fashionable headphones, including brands such as Urbanears and Molami. Back in 2008, when production in Shenzhen did not get o the ground because factories failed to deliver, Zound sent one of the founders, who hired a couple of experienced hands to work with manufacturers. Today the rm has 18 employees in the Chinese city and uses ve factories which have so far produced nearly 8m headphones. For the moment Haxlr8r’s latest batch of startups can only dream of such success. In November they had their demo day, held in San Francisco and marking the beginning of their Kick- starter campaigns, which essentially consist of a video present- ingtheprojectandaskingformoney.Investorscanbesurprising- ly generous, even for rather odd projects. Petcube managed to raise more than $250,000 for a small, internet-connected metal box with a video camera, microphone and laser pointer inside that lets owners watch their pets from afar and play with them by controlling the laser pointer. The Kickstarter campaign is only the beginning of a long journey. Founders must get their products certi ed, nd distrib- utors, organise production and avoid getting sued for infringing other people’s intellectual property. Hardware is really hard, says Amanda Williams, whose company, Fabule, was part of Haxlr8r’s previous batch. She is back in Shenzhen dealing with manufacturers of the rm’s rst product, a programmable lamp. Some of the contraptions may seem a shade frivolous, but Haxlr8r’s startups also included Babybe, an emotional pros- thetic designed to help prematurely born babies to catch up. It transmitsthemother’sheartbeat,breathingpatternandevenher voice to a mattress in the infant’s incubator. With startups you never know what you will get. But the platforms, the accelerators and the ecosystems that allow them to develop are already emerging in other industries, too. 7
  • 16. ware rm, is developing design tools for DNA, code-named Pro- ject Cyborg . As with hardware, Ameri- ca’s west coast and China’s Pearl River Delta may be able to col- laborateonthisoneday though not everyone would welcome the idea because the implica- tions of such biological ma- chines can be quite scary. Silicon Valley is already home to a few biosynthesis startups, for exam- ple Cambrian Genomics, which is developing a machine to print DNA cheaply. Shenzhen is the base of BGI, formerly known as the Beijing Genomics Institute, which does DNA sequencing on an industrial scale. In business the e ects of platforms are already making themselves felt. Companies must either turn themselves into one or become agile ecosystems, complete with startups and ac- celerators, says John Hagel of the Deloitte Centre for the Edge, a re- search arm of Deloitte, a profes- sional-services rm. Coca-Cola, for instance, is planning to launch accelerators in nine cities, including Berlin and Istanbul. Such e orts will change the understanding of what constitutes a rm, says Mr Hagel. The spread of platforms will bring radical changes for workers, too. Many more will become founders or be employed by startups. They will be labourers in the technological gardens whereathousand owersbloom,butonlyafewwillgrowtobe- come really big, says Thomas Malone of the MIT Sloan School of Management. And experts note that some people may nd it hard to get used to such a fast-moving world of work. Governments will also have to adapt. Antitrust authorities will need to be alert because platform operators, which are open quasi-monopolists, will have strong incentives to maintain their dominance. The most powerful of them, such as Amazon, Face- book or Google, will amass huge amounts of information and will form the central data banks for the knowledge economy. No less than companies, governments will have to consid- er what role they want to play in this new world. Currently they resemble a vending machine o ering a limited set of choices, says Tim O’Reilly, an internet expert. But they would work much better as a platform for a thriving bazaar of government ser- vices, o ering basic building blocks that others can use. This suggests that the state needs to limit what it does but do it well. It has to be both narrower and stronger, says Paul Romer of New York University. In a future digital world big busi- ness and big government may play similar roles, as platform managers and curators of ecosystems. Cities or even govern- ments may o er services to other cities and countries in elds such as online identity and regulatory oversight. All in all, the impact of platformisation will be monumen- tal. Those who see the current entrepreneurial explosion as merely another dotcom bubble should think again. Today’s digi- tal primordial soup contains the makings of the economy and perhaps even the government of tomorrow.7 Offer to readers Reprints of this special report are available. A minimum order of five copies is required. Please contact: Jill Kaletha at Foster Printing Tel +00(1) 219 879 9144 e-mail: jillk@fosterprinting.com Corporate offer Corporate orders of 100 copies or more are available. We also offer a customisation service. Please contact us to discuss your requirements. Tel +44 (0)20 7576 8148 e-mail: rights@economist.com For more information on how to order special reports, reprints or any copyright queries you may have, please contact: The Rights and Syndication Department 20 Cabot Square London E14 4QW Tel +44 (0)20 7576 8148 Fax +44 (0)20 7576 8492 e-mail: rights@economist.com www.economist.com/rights Future special reports Previous special reports and a list of forthcoming ones can be found online: economist.com/specialreports Companies and the state February 22nd Robotics March 29th China April 19th International banking May 10th SPECIAL REPORT 14 The Economist January 18th 2014 2 TECH STARTUPS replicated at almost no cost. Systems with vertically integrated components such as the mainframe computer tend to give way to architectures with separate horizontal layers such as the per- sonalcomputer.TodaytheITsectorlookslikeavery atinverted pyramid: the bottom, where economies of scale rule, is made up of just a few powerful platforms; the top, where creativity and agility are at a premium, is becoming ever more fragmented. There is not much in between. As software eats more and more industries, they will in- creasingly take on this shape, predicts Philip Evans of Boston Consulting Group. By lowering transaction costs, IT allows big chunks of the economy to reshape themselves and turn into what he calls stacks industry-wide ecosystems that will have large platforms at one end of their value chains and a wide vari- ety of modes of production at the other, from startups to social enterprises and communities to user-generated content. Stacking up Outside the IT industry such stacks have only just begun to form.In nance,credit-cardnetworkshavelongoperatedasplat- forms, allowing banks to issue their own plastic money. Yodlee, which aggregates nancial data for more than 55m bank custom- ers, now allows startups and other rms to plug into its systems. Some smaller banks, including Bancorp, also see themselves as platforms, keeping the books for innovative online banks such as Simple. Big payment processors, such as First Data and TSYS, are also expected to open up their networks. In telecommunications and electricity, regulators have pushed rms to go horizontal by forcing them to unbundle their services. As power grids become cleverer, smart-meter apps are likely to appear. A new grid in Amsterdam, for instance, is set up in such a way that startups can use it to develop energy-saving applications. Powerful platforms will also emerge in industries that produce piles of data, such as health care. They can provide startups with opportunities to mine the data to nd digital mate- rial for new services. This platformisation is spreading even to the very stu of life. Synthesising DNA is still much more expensive than se- quencing it, but the costs are coming down rapidly, and an eco- system for this ultimate platform is already beginning to form. Half a dozen cities around the world are now home to bio-hack- erspaces (such as New York’s Genspace) where genetic hackers learn how to build simple biological machines. Autodesk, a soft-

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